Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Your Rent Is Not Falling in a Slow-Growth Economy
Transcript
- Lucas: So you know the one inflation number people can't shake, even as the headline CPI cools? It's not gas, it's not used cars. It's rent. Luna: Rent. The thing that eats more of the paycheck than anything else. And it's still sticky even though vacancy rates are creeping up. Lucas: Right. And here's the tension. We're sitting here in early August, and the latest CPI print for June shows headline inflation down from 333.98 to 332.6 on the index. Core CPI is basically flat, 336.1 versus 336.12. So prices aren't rising as fast, but shelter costs? They're refusing to budge. Luna: And that's not just an American thing either. Europe is dealing with drought, supply shocks, but the rent story there is similar—sticky. Lucas: Exactly. So let's unpack why rent is so sticky even when the economy slows. And the 1970s actually give us a perfect lens. Back then, you had high inflation and weak growth, and rent was one of the last components to roll over. Landlords didn't cut rents; they just stopped raising them as fast. That's the stickiness. Luna: But why? Why don't landlords cut rents when demand softens? Isn't it basic supply and demand? Lucas: You'd think so, but there are structural reasons. First, rent is set by leases, often one-year or two-year terms. So even if market rents fall, existing tenants don't see it until renewal. Second, landlords have fixed costs—mortgage, property taxes, maintenance—that don't fall easily. They'd rather leave a unit vacant than cut the asking rent and set a lower comparable for the building. Luna: So it's a game of chicken with the market. But at some point, if vacancies pile up, they have to give in. Lucas: That's the thing—vacancies are rising, but slowly. The latest JOLTS report shows job openings fell to 7.36 million in June, down from 7.54 million. And the unemployment rate ticked down to 4.2 percent. So the labor market is softening, but not collapsing. That gives landlords some confidence that people still have paychecks to pay rent. Luna: And wage growth is still positive—average hourly earnings up to $37.60. So even if inflation is easing, wages are still climbing, which supports rent. Lucas: Exactly. And that's the 1970s echo. In the late seventies, you had wage-price spirals. Wages kept rising, feeding into rents, which fed back into wages. It took a massive Fed tightening—Volcker's shock—to break that cycle. Now we have a Fed under Warsh, and the market is watching to see if he's willing to do the same. Luna: But does the market think he'll actually do it? Because the ten-year breakeven inflation rate is only 2.22 percent—down from 2.23. That suggests inflation expectations are well-anchored. Lucas: Right, that's the market's verdict. They're not pricing a massive reacceleration. But they're also not pricing a quick collapse. And here's another angle: the manufacturing survey that came out this week shows inflation worries 'worse than pandemic era.' So there's a disconnect between what businesses are seeing and what the market is pricing. Luna: And that's the stagflation cocktail. Slow growth, still-hot costs. But back to rent—what's the actual data on shelter inflation right now? Lucas: The CPI shelter index isn't out for July yet, but the June figures had shelter up about 0.3 percent month-over-month, annualizing around 3.5 percent. That's down from the 8 percent peak in 2023, but it's still above the overall inflation rate. And core PCE, which the Fed watches, actually ticked up slightly—from 130.09 to 130.3 on the index. So the underlying stickiness is still there. Luna: So even as the headline CPI cools, the 'supercore'—services excluding housing—might be doing the same. But rent is the anchor. Lucas: Let's bring in a specific case. Take a mid-sized city like Columbus, Ohio. Multifamily construction boomed there in the last five years. Vacancy rates are now around 8 percent, up from 5 percent. But asking rents? Down only 1 percent year-over-year. Landlords are holding the line. Luna: Why would they hold the line when vacancies are rising? What's the logic there? Lucas: Partly because they're leveraged. A lot of multifamily properties were bought with floating-rate debt. Their interest costs have gone up, so they need higher rents just to service the debt. Cutting rents would push them toward breakeven or worse. So they'd rather take the vacancy hit than slash the rent and lose cash flow on every unit. Luna: That's a great point. So the stickiness is baked into the capital structure, not just psychology. Lucas: Exactly. And that's the 1970s lesson again—rent didn't fall in nominal terms; it just rose slower than inflation. That's how you got a decade of eroding purchasing power for renters. And if we're in a similar period now, the real burden on renters stays high even as headline inflation cools. Luna: So what would break this cycle? In the 70s, it was double-digit interest rates and a deep recession. Are we headed for something like that? Lucas: Unlikely to be that dramatic. But the Fed under Warsh might have to keep rates higher for longer to force landlords to capitulate. But that's a painful process. The alternative is that supply catches up. And there is a lot of multifamily construction in the pipeline—particularly in the Sun Belt. That could eventually tip the balance. Luna: But in the meantime, renters are feeling the squeeze. And that feeds into consumer sentiment, which affects spending and GDP growth. Lucas: Right, and growth is already weak. Real GDP growth for Q1 was just 1.5 percent annualized, down from 2.1 percent. So you've got slow growth, sticky rents, and the Fed walking a tightrope. That's the stagflation scenario we keep talking about. Luna: And it's not just the US. The drought in Europe is hitting their economy hard, which could feed into global supply chains and eventually affect our prices too. Lucas: Yeah, and China's factory activity unexpectedly contracted in July on weak demand and typhoons. So the global picture is mixed at best. But let's zoom back to rents because there's a policy angle here too. Some cities are introducing rent control measures, but they don't address the underlying cost structure. They just cap increases, which might make the market tighter in the long run. Luna: Right, because if landlords can't raise rents, some might sell the property or convert it to condos, reducing rental supply. It's a classic unintended consequence. Lucas: And that's a good segue to something we've been thinking about with this show. You know, we love digging into these connections—like how a Fed policy decision in Washington can affect a renter in Columbus. And if that's the kind of economics you enjoy, we hope you'll consider supporting the show directly. We keep it ad-free, and listener support is what makes that possible. If you're able, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's a small way to keep these conversations going. Luna: Yeah, every little bit helps. And it means we can keep doing deep dives like this without any corporate sponsors breathing down our necks. Lucas: Exactly. So back to rents. There's another data point from this week: ADP reported that private companies added just 44,000 jobs in July, below expectations. That's a big drop from the previous month. And initial jobless claims ticked up to 197,000. So the labor market is definitely losing some momentum. Luna: But the unemployment rate still fell to 4.2 percent. That seems contradictory. Lucas: It's because the labor force participation rate also fell slightly. So fewer people are looking for work, which keeps the unemployment rate down even with weak job creation. That's not a strong labor market; it's a shrinking one. Luna: So if job growth slows, that should eventually hit rents, right? People can't pay higher rents if they're not getting raises or worse, losing jobs. Lucas: That's the hope. But the lag is long. Historically, rent inflation lags the labor market by 12 to 18 months. So if the labor market peaked in late 2025, we might not see rent deceleration until 2027. Luna: That's a long time for renters to hold on. And in the meantime, the affordability crisis just deepens. Lucas: And that's the human cost of stagflation. It's not just an abstract economic concept; it's people deciding between rent and groceries. And that's why we keep coming back to these 1970s echoes—because the policy mistakes then had generational consequences. Luna: So what's the takeaway for a renter or a landlord listening today? What should they watch? Lucas: For renters, watch the vacancy rate in your local market. If it's climbing, you might have some bargaining power at renewal. For landlords, watch the Fed. If Warsh starts hiking again, your debt costs go up, and you'll have to decide between vacancy and rent cuts. Luna: And for everyone else, it's just a reminder that inflation isn't one big number—it's a bunch of individual prices moving at different speeds. And rent is the one that moves the slowest. Lucas: And that's the real story. So the next time you hear that inflation is cooling, remember that your rent check tells a different story. Thanks for listening, and we'll catch you next time.